University of Baltimore School of Law's Center for International and Comparative Law Fellows discuss international and comparative legal issues

Tag Archives: Russia

On April 1, 2017, the armed forces of Syrian President Bashar al-Assad launched a chemical weapon attack on a Syrian hospital.[1] Unfortunately, this attack is not the first instance of chemical warfare in the Syrian Civil War.[2]

Raging for the past six years, the Syrian Civil War has claimed the lives of hundreds of thousands of men, women, and children.[3] In 2012, then-President Barack Obama drew the non-infamous “redline”, claiming it would “change my calculus” if chemical weapons were used in the Syrian War. [4] While the Obama Administration appeared to be heading towards another intervention in the Middle East, the administration soon reversed itself, placing its hopes on a deal reached with the Russian Federation. In this 11th hour deal, the Russians were to oversee the destruction of President Assad’s chemical weapons.[5]

While the United States may well have avoided another Middle Eastern quagmire and may well have ceded prestige and influence to the Russians, the world largely watched the horror unfold as thousands of Syrian citizens were rendered helpless by chemical nerve agents. The world was horrified at the effects of the nerve agents, and yet the world continued with business as usual.

Just as then-President Obama was torn between military intervention in the Syrian Civil War and non-intervention, President Trump is torn between intervening in a years-long war and remaining on the sidelines. Even though candidate Trump campaigned on an “American First” platform, consistently claiming he was against the Second Iraq War from the beginning, the President must understand that America must stand for the non-use of chemical or biologic weapons against citizens, or even on the battlefield.

America, from its founding, has stood for the universal rights of freedom and self-determination, enshrined in our Declaration of Independence from George III, chief among them, life, liberty, and the pursuit of happiness. While, like all nations, the history of the United States is tainted with horrific episodes, the United States stands for human rights. In the history of the world, the United States is one of the only, if not the only, nation that fought a brutal civil war to set other men free from bondage.

Furthermore, the United States, and its allies, fought two World Wars under the principles of self-determination and freedom from tyranny, persecution, and genocide. From the ashes of the Second World War rose the United Nations. That institution too, seems incapable of stopping Assad’s gas attacks.

Protected by the Chinese and Russian veto, the Syrian government will probably never pay for its gross violation of international law and the laws of war. This then begs the question: if the United Nations is no longer an institution capable of protecting the innocent, then what is its purpose in its current form? What would make this institution capable of truly bringing violators to justice and face the consequences of their actions?

There has been some discussion on reforming the United Nations Security Council. In what form would such an arrangement take? Would there be any permanent members removed from their permanent positions? Who would take their place? In the event present permanent members are not removed, what members would receive permanent membership? Finally, how would that affect the veto powers?

Some have offered the addition of the “BRIC(S)” as permanent members to the Security Council, minus the already-permanent members of Russia and China. As the leading emerging economies Brazil, India, and South Africa would receive permanent status as well as a veto.

As the largest country in South America, Brazil would add diversity to the Council, as it would be the only permanent member from South America. As another emerging economy with a large population, and a democracy, India would be a leading candidate to receive permanent status. However, given various geopolitical concerns, China would likely vocally oppose any such appointment to the Security Council’s permanent members. Pakistan, India’s longtime rival, would oppose such an appointment as well. Given the absence of an African voice on a permanent basis, South Africa would probably receive the veto and permanent status.But the question would then turn to the following: given the dilution of the veto, what would be its power?

Would the United Nations determine that since there would be as many as eight members, would any veto require just one permanent member to halt a resolution, or would two members be necessary? Could this body become more democratic, with “majority rule” be the rule? If that is the case, how would the decidedly non-democratic states of Russia and China respond? They could, one could plausibly foresee, cut back on their involvement in the Security Council, deciding that they no longer have as much of a stake in the body.

While the United Nations has been unable to protect the innocent in conflicts like Rwanda, the Sudan, Syria, or Eastern Ukraine, the UN must reevaluate its work. The United Nations appears paralyzed and incapable of living up to providing for peace and prosperity for all nations. Perhaps a remedy for this apparent paralysis could include more permanent members of the Security Council while revising the current rules regarding the veto powers of the permanent members.

While the United Nations expressed outrage as from this most recent chemical weapons attack against an innocent civilian population, the UN has not taken any concrete actions against Bashar al-Assad. While President Trump campaigned on an “America First” platform, the president’s most recent actions[6] are polar opposites of such a course. United Nations Ambassador Nikki Haley stated that, regime change in Syria is “inevitable.”[7]

It appears that President Trump is evolving in his new role as commander in chief and as leader of the free world. From campaigning on an “America First” platform to his strikes against Syria, and the dispatching of the USS Carl Vinson strike group to the Korean Peninsula, President Trump has shown he is willing to use military force to further the interests of the United States in the absence of United Nations action.[8]

Bradley Willis is a 3L at the University of Baltimore School of Law. He graduated from the University of Delaware (2014) with a Bachelor of Arts in Political Science and minors in History and French and studied abroad in Caen, France. His areas of interest are international relations, history, politics, and the laws of war. Bradley spent a semester externing with the Hermina Law Group, researching and writing sovereign immunity issues as well as embassy law. Last year, he participated in the Philip C. Jessup Moot Court Competition. He is currently a law clerk for the Law Office of David B. Love, P.A.

Russian Prime Minister Vladimir Putin signed an executive order on Saturday, February 18, 2017 in which he declared recognition of identification documents issued by eastern Ukrainian separatist authorities.[1] The order allows Ukrainian citizens and stateless persons who live in certain parts of the Donetsk and Lugansk regions of Ukraine to enter Russia without a visa or a visa application[2] by presenting civil registration documents issued by rebels in eastern Ukraine.[3] Documents include identification documents, diplomas, birth certificates, marriage certificates, and vehicle registration plates,[4] which would allow people to not only enter and travel to Russia, but also to work and study in Russia.[5] Ukrainian separatist authorities began distributing passports in January 2017.[6] It is estimated that 48,000 passports have been distributed in the region.[7]

Ukrainian forces have been fighting pro-Russia and Russia-backed separatist rebels in the Donbass area of eastern Ukraine since May 2014[8], following a referendum vote in favor of self-autonomy from the area’s two main regions, Donetsk and Lugatsk, to be recognized as the Donetsk People’s Republic (DPR) and the Lugansk People’s Republic (LPR)[9].

On September 5, 2014, the Ukrainian Government and the pro-Russian separatists signed the Minsk Protocol in order to implement a resolution and a ceasefire agreement under the auspices of the Organization of Security and Cooperation in Europe (OSCE). The Protocol was comprised of 12 objectives, including an immediate bilateral ceasefire, withdrawal of illegal armed groups, decentralization of power and local elections in Donetsk and Lugatsk, OSCE monitoring, and continuation of national dialogue.[10] On September 19, 2014, there was follow-up agreement for the removal of heavy artillery from a certain area and the continued OSCE monitoring.[11] However, the Protocol was a failure as intense fighting and violations continued from both sides.[12]

On February 12, 2015 Vladimir Putin, Angela Merkel, Francois Hollande, Petro Poroshenko signed the Minsk II agreement in order to implement and to add onto the measures from the Minsk Protocol.[13] The measures were similar to the Protocol, however, they also included a renewed ceasefire to be implemented by February 15, 2015, constitutional reforms and decentralization from Donetsk and Lugatsk by the end of 2015, safe delivery of humanitarian aid based on an international mechanism, withdrawal of all foreign-armed formations, full social and economic restoration in affected areas, and full Ukrainian control over conflict-zoned Russian border[14]. The leaders also agreed, under a joint declaration, that they were committed to Ukraine’s sovereignty and territorial integrity.[15]The UN Security Council adopted Resolution 2202 in February 17, 2015, in which it endorsed the ceasefire agreements and the full implementation of the Minsk II agreement.[16]

The Minsk II stalemate was eventually disrupted by resurgences from both sides,[17] mainly due to the failures by Ukraine to adapt to the DPR’s and the LPR’s political and economic changes, specifically, regarding constitutional reforms.[18]The Russian Foreign Ministry stated that the order is temporary[19] and based on humanitarian grounds[20] until the Minsk deal and the Ukrainian obligations towards Donetsk and Lugansk have been implemented.[21]

Although the order has been well-received by the DPR and the LPR, Ukrainian and US officials have declared it contradictory to any peace agreements between Russia and Ukraine. Ukraine President Petro Poroshenko has labeled the order as a violation of international law[22] and the Minsk agreements[23]. Ukraine Foreign Minister Pavlo Klimkin stated that the Russian order is an intentional military and humanitarian escalation.[24] The US Embassy to Ukraine stated that it contradicts the agreed-upon goals of the Minsk Agreements.[25] Following a meeting with US Vice President Michael Pence, Poroshenko rejoiced in the US’s support of Ukraine.[26]

Further, German and EU officials have stated that they will not recognize any documents issued by the separatist authorities[27] as they, alongside Russia’s order, contradict the Minsk Agreements by undermining Ukrainian unity and territorial integrity.[28] The OSCE also declared that the order and the distribution of documents contradict any peace-settlement objectives between Ukraine and Russia.[29] The OSCE Chairmanship declared that documents, such as the passports, are only valid on a sovereign territory, such as Ukraine, if they are issued by internationally recognized authorities.[30] The unilateral actions of document distribution and recognition jeopardize peaceful resolution, especially if they are not finalized under the auspices of the OSCE.[31] Such actions “chill” relations among the parties involved, which result into difficult implementation of the objectives in the Minsk Agreements.[32]

Russian Foreign Minister Sergey Lavrov does not believe that the order violates international law, since the law “does not prohibit the recognition of documents needed to implement the rights and freedoms guaranteed by the authorities which are not internationally-recognized.”[33] Contrarily, Lavrov rebutted accusations of international law violations by OSCE Secretary-General Lamberto Zannier by stating that the DPR and the LRP authorities and leaders were actually recognized parties to the conflict by signing the Minsk Agreements, which had been approved by the UN Security Council.[34]

Kremlin Spokesman Dmitry Peskov agreed that the order does not violate international law as it is merely “the de jure alignment of the situation that existed de facto.”[35] The spokesman indicated that the order is based solely on humanitarian grounds instead on grounds for recognizing statehood by claiming that the embargo on the Donbass by Kiev prohibits persons in the DPR and LPR from renewing and/or acquiring necessary documents to seek refuge or asylum in another county.[36]

Russia’s order seems dubious. The Foreign Minister is playing “fence politics” by switching Russia’s legal argument for recognizing separatist authorities in order to not upset the international lawmakers or to divert them from investigating the possibility that Russia is providing actual support to the separatists. Further, basing the order on humanitarian grounds is a contrived effort for persuading the rest of the world that the order is necessary, instead of damaging to Ukraine’s integrity and beneficial to Russia’s stance. The order is in violation of the peace agreements and of international law, as it is enforced unilaterally by Russia, without accordance to the Minsk Agreement. It also demonstrates recognition of competent authorities, which is an indicator of recognition of statehood, without consultation of the agreed-upon self-autonomy Minsk objectives. Since the UN Security Council, which operates on international law, has adopted and endorsed the Minsk Agreements, the violations also violate UN law and, thus, international law.

John Rizos is a 3L at the University of Baltimore School of Law with a concentration in International Law. He has an interest in human rights and international criminal law. In addition to being a CICL Fellow, John has served as the Secretary for Phi Alpha Delta Law Fraternity and has completed HarvardX’s online course, “Humanitarian Response to Conflict and Disaster.” In June 2016, John was a member of the Fellows team that, under the supervision of Professor Moore, assisted in drafting an amicus brief to the Extraordinary Chambers in the Courts of Cambodia, which was later approved and published. John graduated with honors from Towson University with a BA in International Studies (2013). He has interned at the Press Office of the Greek Embassy in Washington, D.C. and the International Civil Advocacy Network (ICAN), a non-profit organization advocating for women’s rights in the Middle East. John currently serves as a MD Rule 19 Student-Attorney with the Juvenile Justice Project at the University of Baltimore.

A United States drone strikes a car near a gas station in Syria.[1] Inside that car, Junaid Hussain lays lifeless.[2] Though a seemingly normal 21-year-old British man with an education and a wife, Junaid possessed exceptional computer hacking skills and ties to ISIS’s cyber division.[3] Instead of the United States sending a sniper to take out Junaid, a person used his or her trigger finger to direct the drone strike from a computer miles away from the gas station.[4] Throughout history, technology has drastically changed warfare. The advances in cyberspace technology are no exception and the law is struggling to keep up.

While country-on-country cyber-attacks have made headlines in the 21st century, such attacks can be dated as far back as the Cold War.[5] In June 1984, a United States satellite detected a large blast in Siberia.[6] That blast turned out to be an explosion on a Soviet gas pipeline.[7] A malfunction in the computer-controlled system that the Soviets stole from a firm in Canada caused the explosion.[8] Unware to them, the CIA caused the malfunction by tampering with the software, resetting the pump and valve settings to produce pressures far beyond the capabilities of the pipeline welds, which ultimately resulted in destruction.[9]

The most recent and controversial cyber-attack resulted in WikiLeaks publishing a series of confidential emails exchanged between several key members of the Democratic National Committee.[10] The release negatively impacted the Democratic Party in the public eye and resulted in the call for resignation from the DNC chairperson, the CEO, the CFO, and the Communications Director.[11] Despite President Trump’s initial accusation, these hackers are not just 400 pound guys in a basement; they are sophisticated and, potentially, dangerous adversarial governments.[12]

The United States accused Russian President Vladimir Putin of ordering an “influence campaign” aimed at weakening Hilary Clinton’s campaign and strengthening Donald Trump’s.[13] The campaign consisted of hacking Democratic groups and individuals and releasing that information via third party websites, including WikiLeaks.[14] Intelligence agencies concluded with high confidence that Russia had intended to undermine American faith in the electoral system by hurting Hilary Clinton’s chances of winning.[15] As a result, in December 2016, America responded with what was arguably its strongest response yet to a state sponsored cyberattack.[16] “All Americans should be alarmed by Russia’s actions” stated Former President Obama.[17] While there is partisan disagreement about the scope and intent of the Russian cyber-attack on the 2016 United States Presidential Election, 77% of Americans from a wide variety of political backgrounds believe that cyber-attacks against computer systems in the United States are a serious threat.[18] Meanwhile, 63% of Americans believe that the United States is not adequately prepared to deal with these cyber threats.[19]

While President Trump has repeatedly stated that the Russian hacking had no influence on the outcome of the election, it is becoming clear that cyber-attacks are becoming more prevalent and powerful.[20] Intelligence agencies reported that the Russian election intervention is an old-fashioned Soviet-style propaganda campaign made more powerful by the tools of cyberage.[21] While it may seem like this was a onetime event and new attack, it was actually a part of a campaign that went undetected for years.[22]

The same international laws apply to cyberspace as they do to traditional warfare domains. Yet, cyber-attacks are difficult for the international community to analyze due to their complexity and secrecy. In response to this challenge, the NATO Cyber Centre wrote the Tallinn Manual on the International Law Applicable to Cyber Warfare.[23] Applying the principles of the international law of war in cyberspace, the manual has been the primary guide for armed conflicts.[24] According to the principles in the manual, the Russian cyber-attacks on the DNC are below the threshold of an armed conflict.[25] On the other hand, if Russia had destroyed America’s cyber infrastructure, it would likely be enough to be a use of force and thus a violation.[26]

Yet others experts, such as the chairman of the U.S. Naval War College’s international law department Michael Schmidt, believe that the DNC hack was in fact a violation of international law.[27] For example, the hack could have threatened U.S. sovereignty.[28] The hackers attempted to intervene into the internal fairs of the United States affairs, which includes running elections.[29] However, there would need to be proof that Russia not only stole information but used the information to manipulate election results.[30]

Therefore, the DNC hacks still lie in a legal gray zone. While the Tallinn Manual provides excellent guidance on applying international law in cyberspace, the Tallinn Manual 2.0 is in the works to expand upon it.[31] The goal of this additional manual is to examine how international law applies to cyber-attacks below the threshold on an armed conflict.[32] Until then, clever nations will continue to use cyber-attacks, like the DNC hack, to cause harmful effects but not cross the line that would trigger an armed response.[33]

Elizabeth Hays is a third year law student at the University of Baltimore School of Law. She completed her undergraduate studies at the University of Baltimore, where she majored in Jurisprudence. Her legal interests include administrative law, national security law, and maritime law. Elizabeth has previously interned with the U.S. Army JAG Corps and the U.S. Coast Guard JAG Corps. Additionally, she participated in the winter study abroad program in Curaçao in 2015/16. She is currently the Co-President of University of Baltimore Students for Public Interest (UBSPI) and a Staff Editor for University of Baltimore Law Forum.

In my first post, I defended a much-criticized theory of tax reform,[1] called “formulary apportionment (FA),” by examining two tax dynamics in the oil industry in Russia. My conclusion was that the potential for market distortion when implementing a tax regime is so high that to cite that possibility as a weakness of FA is an over-generalized attack, and therefore invalid. I also pointed out that the industry chose to reinvest in low-return crude oil rather than investing in refinery upgrades during the time taxes had been lowered on crude oil exports. This example of “short term thinking” supports the premise of FA, namely that multi-national corporations (MNCs) gravitate to low-tax areas, even against their own long term interests. This week, I address another attack leveled at FA: that FA is weak in comparison with a solid modificaiton of the current system that allows transfer pricing. There are two variations of this critism, first in the form of a scholastic opinion from Professors at the University of Michigan Law. They say if the current system of residual taxation in the U.S. were properly applied, FA would not hold its own when stacked up against a “properly applied” worldwide regime.[2] The second variation is in the form of an actual proposal by the OECD, which makes recommendations to modify, but still keep, the current separate entity approach based in transfer pricing.[3] Credible advocates of FA cite the weakness of both the “properly applied” plan and the OECD proposal as efforts to ‘tweak’ a system that will still support aggressive profit-shifting. Interestingly, some believe that implementation of the OECD proposal will actually result in an eventual adoption of FA.[4]

A few readers may be aware of the groundswell toward international reform driven by the highly-distortive market effects of transfer pricing. If you aren’t, here is short version. Business dealings across boundaries raise the question—what income will be taxed by which government? The current system for most MNEs is to employ “the arms-length” method, which permits transactions between parent and subsidiary companies (“transfer-pricing”), though located in different countries as independent, taxable events.

Tax credits to prevent double taxation would apply in accordance with the applicable international treaties, and the tax bases can be aggressively affected as corporations seek to maximize after-tax profits by constructing the transactions in such a way that income shows up in low or zero tax countries.[5] FA, a “unitary” system, regards a company as a single unit, and then formulates a top-down division of its income into countries based on agreed-upon factors.[6] The goal of the reform is to prevent base erosion and eliminate complexity.

Some scholars claim that if the U.S. had proper enforcement and clarity in the law regarding its residual tax, the value of low-taxed foreign-source income would be neutralized. U.S. residual tax is the liability applied to the balance of income not covered by a foreign tax credit. At present, deferral and cross-crediting features of the U.S. system allow its residual tax to be eliminated or substantially reduced. Ideally, tax would be imposed on low-taxed foreign income of U.S. residents as the income was earned, thus removing the impetus to defer the repatriation of foreign income. While still seeing some distortion, it cancels FA as a unique solution, since both (the well-enforced system and FA) would run about neck-in-neck with negative, distortive effects of base eroding deferrals and cross-crediting.[7] A properly applied system, it is argued would make the U.S. a true “territorial” regime, whereas with deferrals, cross-crediting, and other features of the U.S. system make it so badly flawed that it is not a true worldwide regime.

However, Joseph Stiglitz, a Nobel-prize winner and one of the most outspoken critics of global economic inequality recommends scrapping the arms-length principle. He argues that small tweaks will not prevent aggressive, artificial moves of earnings and profits to low-tax countries. For example, the evolution of intangibles in a global, digital economy makes the arm-length pricing impossible. Where the cost of a barrel of oil for the purpose of an arm’s length transaction can be determined using “comparables,” one cannot fix a comparable for an iPhone in which the camera feature alone has 279 patents.[8] Another downside, he states, is that countries who lack the ability to keep up with high-stakes profit manipulation are exploited.[9] It is hard to imagine Eritrea coming out as a winner against a Pfiezer or a Siemens!

Drafters of the OECD current proposal for model rules and treaty creation doubt that FA’s formula-based system would encourage investment decisions that are more efficient and tax-neutral than under a separate entity approach. The Secretary-General of the OECD states its proposal will drain the motivation to shift profits by re-aligning taxation with economic activity and value creation and put an end to double non-taxation.[10] For example, the proposal kicks-off negotiations towards synchronicity within the global network of bilateral tax treaties with the goal of implementing treaty-based BEPS measures.[11]

Critics of the OECD proposal argue that “Luxleaks-type” tax avoidance facilitated by tax rulings is still possible. Implementation of the proposal will not only not eliminate the practice of using secret tax rulings, it will increase the complexity of the international tax system.[12]

Surprisingly, some experts claim that certain approaches called for by the OECD may have an unintended consequence: specifically, regarding the proposed call for country-by-country reporting for taxpayers and that income be tied to “significant people functions” (a way to apply tax to non-financial services sector).[13] These experts assert that these OECD proposals will incentivize a formulary approach among multinationals.[14] To the extent a boots-on-ground implementation of the OECD requirements begins, we may see a move to a formulary system, even absent a comprehensive overhaul.

In my next blog I will discuss how the recent Russian bunker oil pricing continues the global tax reform analysis. Stay tuned!

Julia Brent is a third year law student at the University of Baltimore, focusing on International Tax (candidate for J.D. 2016). Julia graduated from the University of Hawaii with a B.A. in political science. As a CICL student fellow, she is interested in the tax impact of cross-border transactions on medium to large businesses. Julia has extensive experience in the management of high volume cases, including handling distributions related to a multi-million dollar art estate and managing all expert witness contracts for the Savings & Loan (WINSTAR) litigation, a $30 billion dispute involving 125 cases, on-site at the Department of Justice.

The global tax system needs an overhaul.[1] The growth of international opportunity has created a danger for the economic health of many countries in the form of tax base erosion. Multi-national companies (MNCs) raise revenues by using domestic tax laws to shift profits in a system that puts investors in the dark, hinders compliance, and encourages peculiar, need-of-the-moment legislation. Examples of such piecemeal legislation include the current U.S. Senate proposal for a temporary 6.5 percent repatriation tax holiday to fund highways[2] or Belgium’s 2016 proposed “Diamond Regime,” which eliminates the ability to carry forward losses of the MNCs of that industry.[3]

Reform is needed. One much-criticized theory of reform, called “Formulary Apportionment” (FA), still holds its ground in scholastic circles,[4] and this paper attempts to defray a criticism that FA potentially distorts the market, and therefore should be dismissed. FA would restructure a MNC’s taxes so that it pays income in a country based on a formula-based fraction of total income. The goal of FA is to repatriate income that has gravitated to low-tax countries and, in so doing, has undermined the local tax base. Russia’s new tax regime weakens the criticism of FA in a surprising way: Russia’s recent attempts to create a growth-oriented tax system resulted in negative market distortion despite their best efforts. This example negates dismissing the theory of FA reform out of hand on the basis of a difficulty faced by tax systems generally. In addition, the reason for the market distortion in Russia supports FA, in that during the post-2000 tax regime, the oil industry went against its own interests and gravitated toward low-tax products, actions that would have undermined the industry base but for other factors. [5]

FA reform is based on a formula-based fraction of total income (sales, payroll, and capital stock), with the fraction tied to the geographic point of sale. In the U.S., MNCs currently determine their profits separately in each operational jurisdiction, while goods or services are sent all over the world. A system of FA would replace this separate accounting method. For example, a MNC would pay U.S. taxes only on the share from its total income that is allocated to the United States.

A move to FA would noticeably reduce incentives to shift economic activity or income to low-tax countries, and by treating similar firms in a uniform fashion, regardless of where they are incorporated, would eliminate much administrative complexity. The theory, however, has been regarded as having many faults, most of which center around the hazards of applying the method in the current environment of different systems and different currencies. One stand-alone criticism, and the subject of this blog post and the two subsequent posts over the next weeks, is that there would be problems in violations of a commitment to a growth-oriented tax system that minimizes the distortions of market signals (the stated OECD goal for tax reform among OECD nations).[6] However, it could be argued that the FA method of taxing based on geographic location of sales would likely support growth because it allows for a “local” government, which is closer to the source income, to potentially promote the industry with careful tax design.

Russia’s new tax regime has such a goal for its oil industry; policy-makers’ desire to stimulate upgrades in its oil refineries. Russian refineries were originally built to satisfy the demands of the Soviet industry, and, as of 2000, produced large volumes of fuel oil, low-quality diesel, and low-octane gasoline.[7] Its crude was mostly processed to be fuel oil for domestic heating needs.[8] Now, the market has a permanent demand for the higher flashpoint fractions, i.e., high-octane gasoline, petrochemical feedstock, and jet fuel.[9] In 2000, the government took on configuring a “growth-oriented tax system,” one that would not only encourage refinery upgrades, but also satisfy the needs of the government, since thirty-two percent (32%) of Russian government revenue comes from oil-extraction taxes.[10]

To stimulate refining depth, Russia implemented the equivalent of a micro-version of FA when applied to the Vertical Integrated Oil Companies (VIOCs) (the “well to pump” large companies, like Royal Dutch Shell or Exxon). The oil industry has two sectors generally, “upstream” and “downstream.” The first refers to all aspects of lifting crude from a field, and the second refining the crude (either by straight run or the more processing-intense ‘cracking’) to produce valuable products like gasoline. Refineries, obviously, are part of the downstream sector. Russia chose to structure its tax burden evenly between the upstream and downstream sectors, in the hopes of creating cross-subsidy between upstream and downstream segments, providing significant impetus to refineries, including primary processing plants. This it did by lowering export duties on oil products, and pricing crude oil domestically as a function of export netback price.[11] “Netback” subtracts the costs associated with bringing one unit of oil to the marketplace from all of the revenues from the sale of all the products generated from that same unit. By basing the tax regime on the concept of “netback” and then working backward to figure tax on a fraction that is tied to sector, this is similar to the structure of FA when applied to the microcosm of a VIOC.

The result was that since the year 2000, the total output of Russian refineries has risen from 190 million tonnes to 302.5 million tons, with VIOCs accounting for 57% of increased volume.[12] In only eight years, from 2005 to 2013, total downstream investments by domestic VIOCs soared from US$1.4b to US$10b, with investments over the past three years rising by US$2.3b*.[13]

An interesting aspect in this result was that the initial response by the VIOCs was to use the savings on exports to just do more of what they were already doing, i.e. producing low grade oil products. Although dashing the hopes of Russian policymakers, the tax maneuver indirectly drove refinery upgrades as the extra funds were available as VIOCs responded to market pressure by ultimately upgrading the refineries.

Though the result appears to strengthen the criticism that FA results in negative market distortion, it actually undermines the criticism for two reasons. First, by virtue of the fact that distortions simply happen despite efforts to the contrary: a favorable tax environment was and is seen in Russia as a crucial driver of investment activity in the downstream segment. A general attack discounting FA as a legitimate theory for this reason is inadequate at best, since FA is such a large system reform.

Second, the Russian cross-subsidy example supports the FA reform broadly in an unexpected way. FA advocates assert that the current system generates a large tax incentive to earn income in low-tax countries, and multinational firms respond by earning disproportionate profits in low-tax locations. In the Russian example, even though it was in the VIOC leaders’ best interests to upgrade refineries – and there were many upgrades that were financially feasible – when faced with the lowered duties on exported oil products, rather than upgrading, producers gravitated toward the low-taxed products in their own industry.

In my next blog I will discuss how the recent Russian bunker oil pricing continues the global tax reform analysis. Stay tuned!

Julia Brent is a third year law student at the University of Baltimore, focusing on International Tax (candidate for J.D. 2016). Julia graduated from the University of Hawaii with a B.A. in political science. As a CICL Fellow, she is interested in the tax impact of cross-border transactions on medium to large businesses. Julia has extensive experience in the management of high volume cases, including handling distributions related to a multi-million dollar art estate and managing all expert witness contracts for the Savings & Loan (WINSTAR) litigation, a $30 billion dispute involving 125 cases, on-site at the Department of Justice.

Russia owns the North Pole. At least… Russia claims it owns the resources of the North Pole. When it comes to expanding its territorial influence, Russia has been busy lately. Invade a neighbor here,[i] illegally annex some territory there,[ii] and violate airspace elsewhere. [iii] Russian President Vladimir Putin’s latest foray is a resource claim to a vast swath of the Arctic Ocean, including North Pole.

To be fair, Russia is at the moment making this grab via lawful means unlike, for example, its illegal annexation of the Crimean peninsula. Russia has made its claim under the 1982 U.N. Convention on the Law of the Sea (UNCLOS).[iv] UNCLOS defines coastal states’ claims to adjacent waters. Under the treaty, a coastal state has exclusive economic rights, meaning sole access to and control of all the resources, in waters extending 200 nautical miles from its coast. UNCLOS also allows a coastal state to claim exclusive economic rights over any part of the ocean over the continental shelf protruding from the coastal state. Continental shelf rights can exist beyond the EEZ up to 350 nautical miles from the coast if the coastal state can establish that the foot of the continental slope exists that far out[v]. The EEZ and continental shelf areas are not part of the state’s territory, although they are immensely valuable to the state because the state alone has access to all the resources, such as oil and fish, and can prohibit other states from accessing those resources.

Russia claimed in August that the foot of its continental slope exists 350 nautical miles, and possibly even further, from its coast. Therefore, Russia is entitled to exclusive economic rights that far from its coast.[vi] The claim far exceeds current understandings of arctic exclusive economic rights, which limits Russia to the outer limit of the EEZ. If Russia’s claim is valid then Russia has exclusive economic rights to over 460,000 square miles of the Arctic Sea, including the North Pole, all of which is currently classified as international waters. The area is estimated to contain up to 10 billion tons of oil and gas deposits, as well as large fisheries, and vast reserves of diamonds and valuable metals such as gold, tin and platinum.[vii] In addition, major potential shipping routes are emerging as global warming melts the polar ice caps. It’s not surprising that Russia wants to control this area itself given its significant economic importance, strategic advantage, and increasing accessibility.

Russia has been building toward this claim since at least 2002 when it filed a similar UNCLOS claim which was rejected for lack of scientific evidence.[viii] Since that time Russia has been amassing what its Foreign Ministry claims is “a broad range of scientific data collected over many years of Arctic exploration” to support its argument that the continental foot exists 350 miles from shore.[ix] Russia was not shy about asserting its North Pole presence while it was gathering all that evidence. In 2007, Russia dispatched a well-known Russian explorer in a submarine to the seabed directly below the North Pole where he took a soil sample and planted a Russian flag made of titanium.[x] More recently, last March Russia asserted its military strength in the area with a massive exercise involving over 40,000 servicemen, 41 warships, and 14 submarines.

The U.N. Commission on the Limits of the Continental Shelf will deliberate Russia’s claim at its next session.[xi] The Commission must consider if Russia’s newly presented evidence is enough to grant Russia the exclusive economic rights it desires. Russia will likely have to have a far more convincing case than it did in 2002.

Not to be outdone in the race for a treasure of resources and shipping routes, the United States, Canada, Norway, and Denmark all have their own claims to exclusive economic rights in the Arctic, many of which extend beyond the EEZ. (It should be noted that the United States has not ratified UNCLOS.) As the ice melts, all the bordering states are looking to take advantage. The competing interests make the cold North Pole a potential hot spot for violent conflict.[xii] The potential for Arctic conflict is certainly amplified if the U.N. denies Russia’s claim as expected. Or, for that matter, if the claim is approved, then the United States, Canada, Norway, and Denmark will be forced to do something to hang on to their power in the Arctic. Russia is certainly capable of using force, or at least forceful deterrent, to protect what it views as its exclusive Arctic resources. Russia has proven in Crimea that it is willing to violate international law to expand its territory and power even in the face of punitive sanctions. Amidst increasing tensions in the Ukraine, Syria, the Balkans, and elsewhere, Cold War rivalries might finally heat up to hostilities in the Arctic.

Matthew Matechik is an Evening J.D. student at the University of Baltimore School of Law (Class of 2016). He currently works full-time as a Counterterrorism Analyst. He has a Bachelors of Arts (Magna Cum Laude, 2008) from Florida State University.

Events this year, primarily those orchestrated by Russia, have again reignited the debate over whether Sweden and Finland should join the North Atlantic Alliance. Most concerning to both NATO allies and Europe’s non-Alliance members alike was Russia’s annexation of Crimea earlier this year, followed by Russian activities in the east of Ukraine. In scenes reminiscent of the Cold War, , Sweden embarked upon its largest maritime mobilization since the end of the frozen conflict in its search for a mystery vessel suspected of being some type of Russian mini-submarine in Swedish territorial waters. The Swedish maritime search, along with repeated and recent violations of Finnish airspace by Russian combat aircraft, has these two nonaligned Scandinavian countries on edge and rethinking their defense postures. Sweden and Finland both successfully navigated military nonalignment throughout and following the Cold War, though under very different circumstances. However, with a newly invigorated Russia that appears to disregard international law at every turn, now may be the time for Sweden and Finland to advance discussions on joining NATO.

Sweden, historically an adversary of Russia, lost the eastern third of the Kingdom of Sweden to Russia during the Finnish War from 1808 to 1809. Thereafter, Sweden devised and maintained its military policy of nonalignment, which kept them out of both World Wars and the Cold War. That eastern third of Sweden, however, became the Grand Duchy of Finland and remained under Russian control until Finland declared independence during the 1917 Russian Revolution. Finland fought Soviet aggression throughout World War II, even briefly aligning with Nazi Germany in what Finland calls the Continuation War. Finland ended up paying reparations and ceding territory to the Soviet Union following the war and signed the Agreement of Friendship, Cooperation, and Mutual Assistance with the Soviets in 1948. Left out of the Marshall Plan, Finland lagged economically behind its West European neighbors until the 1970s. With the fall of the Soviet Union in 1991, Finland emerged from the Soviet shadow as truly independent. So, while Sweden’s choice to pursue nonalignment was actually of its own accord, Finland’s had more to do with concern over possible Soviet retaliation.

Despite the two Nordic countries’ nonalignment policy, both maintain advanced, competent militaries and possess both NATO and US equipment, including, for example, the McDonnell Douglas (now Boeing) F-18C/D (Finland) and the Lockheed (now Lockheed Martin) C-130 (Sweden). Additionally, both are part of NATO’s Partnership for Peace program, train frequently with NATO forces, and integrate well with NATO, US, and other European militaries. Swedish and Finnish forces have even deployed to Afghanistan with NATO’s International Security Assistance Force (ISAF). Thus, meeting the standards of and effectively integrating with NATO would not present the type of challenges similar to those of recent NATO, and former Warsaw Pact, countries. Both countries would, however, need to increase their defense budgets if they wanted to meet NATO’s agreed target of two percent of a country’s GDP. According to 2012 figures, Sweden’s defense budget was 1.2% of their GDP and Finland’s was 1.5%. However, it is not a precondition that the two percent figure be met prior to joining the Alliance, as many current NATO members regularly fall short of that target.

More challenging than military interoperability would be mustering the political will in both countries to affect such a partnership in acceding to the Treaty. Unlike the US, where the President and two-thirds of the Senate can commit the country to a treaty, the constitutions of Sweden and Finland require a referendum. But neither country has the support from a majority of the voters, with recent polls indicating that just over one-fifth of Finns and just under one-third of Swedes favor joining NATO. Those who prefer the tradition of nonalignment to a multilateral defense pact believe a better option is reinforcing bilateral defense cooperation or, preferably, even strengthening Nordic defense cooperation. Entering into defense arrangements with regional partners can certainly reduce the financial impact of developing and sustaining a robust defense force, most notably in the areas of research and development and weapons and systems procurement. However, Sweden and Finland will be limited in their Nordic partnership pursuits since NATO members Norway and Denmark will continue to modernize their militaries first and foremost through the Alliance. Despite the impediments to joining NATO, particularly from the voters, political and military leaders of both countries increasingly recognize the importance of advancing from debate to action the process towards membership. In response to a discussion about whether or not Sweden could hold out even a week against a Russian attack, former NATO Secretary General Anders Fogh Rasmussen remarked that “Sweden cannot count on military support from NATO unless it becomes a member state.”

Though Russia has no legal basis for preventing the two countries from joining NATO, their threatening rhetoric would seem to indicate they believe otherwise. In 2013, Russian Prime Minister Dimitri Medvedev stated that Sweden and Finland joining NATO would upset Europe’s balance of power and force Russia to respond. A senior adviser to Russian President Vladimir Putin, in response to the possibility of Sweden and Finland joining NATO, remarked that “anti-semitism started World War II, [and] Russophobia could start the third.” Russia’s former chief of their armed forces, speaking to a national defense audience at the University of Helsinki, asserted not only that Finnish-NATO cooperation threatens Russian security, but even questioned Finland’s right to hold military exercises on its own soil. Following their annexation of Crimea, Russian forces in the north then held military exercises on Finland’s border.

Arguing against Sweden and Finland joining NATO because it antagonizes Russia is hardly a rational, if even a reasonable, argument. But provocative or even hostile comments threatening a sovereign nation for exercising its political and military rights, along with both overt and covertactions that violate the territorial integrity of another sovereign nation, would seem to be both reasonable and strong evidence of behavior implicating Article 2(4) of the UN Charter.As Russia and its president advance their anti-western rhetoric and activities, Sweden and Finland should advance their discussions around a defense posture that provides certain security in an increasingly uncertain environment.

Clark Smith is a third-year law student pursuing a concentration in International Law. He has undergraduate and graduate degrees in Political Science and International Relations. In addition to being a Student Fellow, he is the Submissions Editor for the Journal of International Law. His previous experience includes work in both security and policy and his previous overseas postings include Western Europe, the Balkans, the Middle East, and South Asia. His professional interests include international development.